When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run,then
A)aggregate demand curve shifts rightward.
B)output will be at its potential.
C)inflation rate will be higher.
D)all of the above.
E)both A and B.

Question

Quizplus · Accepted Answer

When monetary policymakers attempt to stabilize economic activity in response to a temporary negative supply shock by increasing the money supply, the aggregate demand curve shifts rightward to counteract the decrease in output, leading to higher inflation rates. Thus, while output may temporarily move towards its potential, the trade-off is a higher inflation rate, making all of the given statements correct.

When the Economy Suffers a Temporary Negative Supply Shock and the Monetary